Selecting a Merchant Account Published: Mar 03, 2005
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Shopping for a merchant account is a confusing and difficult process. And, unfortunately, many merchants do themselves not a big favor by going shopping without first understanding what they are really shopping for.

Selecting a Merchant Account

Shopping for a merchant account is a confusing and difficult process. And, unfortunately, many merchants do themselves not a big favor by going shopping without first understanding what they are really shopping for.

It's simply not enough to research the rates of banks and independent sales organizations/merchant account providers to find out which are lowest. You must also know the different types of accounts available to determine which one is really right for you. So, why not just shop for the lowest rates?

Because the accounts that offer the cheapest rates won't necessarily be right for your business. Retail/card swiped accounts often have the lowest rates but carry requirements that, if not met by the merchant, will result in additional fees, surcharges, and even penalties. For example, if you're signed up for this type of account but are not able to swipe a card electronically, some processors charge you as much as 1 percent to 2 percent more. Especially being a web host means doing business on the Internet. You might not even need to look at the rates for physical transactions. It is much more important to find out the rates for virtual transactions.

Back to not being able to swipe a card electronically. In the business world, these are known as nonqualified or disqualified transactions. This means that the transaction won't meet all the requirements and therefore it doesn't qualify for the best rates. The real-world effect can be a monthly bill that's much larger than what you expected, leaving you wondering what happened to that great deal you thought you were getting when signing up with this provider. Always make sure you're using an account that's right for your business.

Crucial Distinctions
What account types do exist? This would be easy to answer if every merchant account provider would use the same terms, fees, and structured pricing in the same way as everyone else. Unfortunately, life is never so easy. Nevertheless, please allow us to say that, in general, credit card merchant accounts are classified as one of the following account types:

Retail/card swiped accounts are designed with the typical brick-and-mortar merchant business in mind, one who can swipe the card through an electronic terminal reader as proof that the card was present.

Retail/keyed entry accounts are designed for situations in which the card is present but the merchant is unable to electronically swipe the card. The magnetic stripe might be damaged as an example. Important: The card numbers are keyed into the physical terminal.

Rates for these accounts are generally a little higher than those for card swiped accounts, but can be lower than Internet rates. Important: Retail/keyed entry merchant accounts require that the merchant can (not must) obtain a manual imprint of the card in addition to the customer's signature. Examples of merchants that fit this account type include mobile merchants, such as locksmiths and arts and crafts dealers. Why are the rates higher? Due to the higher risk somebody using a stolen credit card number and customer name to charge an account.

Mail order/telephone order/Internet accounts are for those merchants who don't usually see their customers and therefore cannot obtain a physical swipe read on a terminal or an imprint of the card. Not surprisingly, these transactions carry more risk and are therefore more expensive than normal rates. You will need a virtual terminal to be able to make keyed transactions. Authorize.net would be such a provider for a virtual terminal.

What kind of Credit Card Merchant Account Is Right for you?

Use a retail/card swiped account with a physical terminal if you see your customer and are able to electronically swipe 90 percent or more of your transactions. This is a good option for somebody doing local business from a physical store mainly selling non-recurring services.

Use a retail/keyed entry account if you always see your customer and can obtain a manual imprint of the card but not swipe it, or if you routinely swipe fewer than 90 percent of your sales. This sort of credit card merchant account is also a good option for a business mainly targeting the local market.

Use an Internet account anytime you don't see your customer face to face AND have a lot of recurring payments to take care of.

When doing the research - ask the merchant account provider to provide you with a sample invoice representing a typical month. Let them explain every single fee.

When is time for you to get a real merchant account? In many cases it makes sense to have your own merchant account when your monthly sales volume that is charged to credit cards reaches $1,000 or more. Close to that point the fixed fees for the merchant account equal the higher transaction fees or 3rd party providers like PayPal or 2Checkout.

How does credit card processing actually works in the web hosting industry?

Accepting credit card payments through your web site actually requires multiple components. There are usually 3 things involved when a customer makes an online payment.

Your Order Form - The customer decides to use your services and accesses your order form on your website. You must have code/software in place that will collect the client information and billing information. The information must be stored in a way that it can be accepted by the payment gateway.

The Payment Gateway - This is the part that will transmit your customer's order information to an Internet merchant account provider (e.g. Authorize.net). The payment gateway does the actual credit card processing in the moment the transaction happens.

The (Internet) Merchant Account - A credit card merchant account is an account with a financial institution (merchant account provider) or bank, which enables you to accept credit card payments from your clients. The payment gateway will transmit the billing information received when the actual transaction took place to the merchant account provider.

How much does a credit card merchant account cost?

Understanding the total costs of your merchant provider can be tricky. Typically, an internet merchant account will have several types of costs associated with it:

Application Fees
Most merchant accounts will require an up-front application fee. This fee, supposedly, is to cover the initial cost for processing your application. In case you decide not to open a merchant account or if your credit standing is really bad, they still cover their initial costs. Although good providers waive these fees in case they deny your application and I recommend that you choose a provider that does not require an up front fee (if you find one). Local banks might be a better option in those cases. They want to keep their customers and you could be moving an account to another bank and they lose the thing, makes them often do a little more.

On Going Fixed Fee
Almost every merchant account providers require you to agree to a monthly fixed fee or "statement fee" as it is often named. This is simply another way to cover their fixed costs and to make money. It'll be almost impossible to find a provider that does not require this type of fee on a monthly basis. However, do not choose a merchant account that requires you to pay more than $10.00 per month. In addition to that, most merchant providers require a monthly minimum fee (usually $20.00 or $25.00). This will bring your fixed fees to around $30.00/$35.00 as a minimum.

Discount Rate
In most cases the discount rate will be between 2% and 4% - depending on the card provider (Visa, AMEX, MasterCard/Diners Club/Discover). The discount rate is the sales commission the provider earns on each sale (but partially has to pass it on to their upstream provider - usually the credit card company). For example, if the discount rate offered is 3%, and you receive a sale over your web site for $10, you will owe $0.30 to your credit card merchant provider.

Fixed Transaction Fee
Every credit card transaction will be associated with a fixed transaction fee. Usually the amount of the fixed transaction fee is between $0.20 and $0.30. Unlike the discount rate, the fixed transaction fee is the same for every transaction. Whether you get a $0.50 sale or a $100 sale - no matter if you have 10 transactions a month or 10,000 transactions, the fixed transaction fee will always be the same.

Termination Fees
Often hidden in the fine print of a contract, a termination fee can apply if you cancel your merchant account within a specified period of time (usually within one year). But beware; some credit card merchant account providers require a two-year commitment! Make sure you get this information upfront so that you can decide if you really want to sign a 2 year agreement.

Miscellaneous Fees
There can be additional fees. Make sure you clearly ask for all fees involved and get this in writing from the provider. An example for a miscellaneous fee would be the charge back fee. If a client disputes a charge on a credit card you might get charged back. Not that you will lose the sale - you will also have to pay a penalty (charge back fee). Be aware - many chargeback's on your account will lead to termination of your account by the provider.

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Comments (1)

  • Gravatar - Guido Faecke
    Guido Faecke 07:19, March 4, 2005
    Great Article.

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